There were signs that alternative asset classes might finally take off in Scandinavia and Iceland. But the events of recent weeks could set the agenda back. Angele Spiteri Paris reports ...

Nordic investors may well have a great interest in alternative asset classes like hedge funds. But certain third-party fund managers in the region believe that in times like these, pension schemes and other investors should be concerning themselves with other, more fundamental issues like asset allocation and portfolio structures.

A recent survey by Kirstein Finance, a Copenhagen-based investment consultant, gives an insight into investor appetite for alternatives. Annually the firm carries out a survey of investor needs among Scandinavian and Icelandic institutions. This year, for the first time, the firm published an additional report into alternatives.

Jan Willers, financial analyst at Kirstein Finance, says that the impetus for the alternatives survey was demand from the industry.

“We don’t have to carry out a survey to find out that there is a huge interest in alternative investments, but the interesting thing is to find differences and similarities within the Nordic region for the different kinds of alternative investments which have different characteristics and purposes in the portfolio,” he says.

According to Willers, private equity is of huge interest among Nordic investors, along with property. But the top scorer is infrastructure.

Of course, as Willers says, interest between the different Nordic countries differs. The interest for hedge funds in Denmark is still surprisingly low, Willers says, but he notes that interest from Danish investors varies considerably.

Statistics from the Federation of Danish Investment Associations – Investerings Forenings Rådet (IFR) – show that the nominal value of hedge fund investment has risen from zero in 2005 to DKK 5,276m (£560m) as of July this year.

Building blocks
However, even if this does say something about the rise of alternatives in Scandinavia, fund managers seem to be in no haste to rush down this path.

In these days of rampant panic and sliding equities, many believe that a closer look at the building blocks of an investment portfolio would be more appropriate.

“Rather than whether investors are increasing their alternatives allocation or not, the more important issue is how they have structured their portfolio,” says Gunnar Dahlfors head of institutional clients, Carnegie Asset Management. This is the boutique asset management arm of Carnegie Investment Bank, which registered SEK6bn (£497m) of inflows in the first six months of
this year.

Dahlfors believes investors would do well to integrate the concept of dynamic strategic allocation into their investment thinking. “This would see them not only carrying out an asset-liability modelling study just once a year, but looking at their portfolios on an ongoing basis to define their buffers and asset allocation,” he says.

Allan Polack, CEO of savings and asset management at Nordea, says: “Clients can sometimes end up with a portfolio made up of lots of bits and pieces with no coherent portfolio thinking behind it. Therefore you could say there is a need for institutional and retail investors to take a closer look at the building blocks of their portfolio.”

This could mean a return to more traditional asset classes. Anders Jonsson, managing director at DnB NOR Asset Management, based in Stockholm, says: “I think many institutions feel they get the most out of the financial markets by investing in traditional assets. It is also easier for them to assess quality of managers within these asset classes.”

DnB NOR is Norway’s largest financial services group with offices throughout Scandinavia as well as overseas. The life and asset management business of DnB NOR had NOK556.4bn (£53.7bn) under management as of the second quarter of this year.

Dag Tjernsmo, head of international operations at Svenska Handelsbanken Asset Management, expects investors to reassess their strategic asset allocation over the next nine to twelve months. The firm’s parent company is a ‘universal bank’, that is, it provides services covering the whole of the banking sector.

But the likelihood is that the recent events in capital markets will see most investors take a cautionary stance and wait before taking any major decisions.

“I don’t think many people are taking any decisions at the moment,” says Rune Sanbeck, head of Nordic markets for Barclays Global Investors (BGI).

Jan Eggersten, business development director at T Rowe Price, says: “All exciting moves have either been postponed or cancelled. The level of trust has declined and investors do not know what’s around the corner. Due to the lack of transparency the focus has shifted and investors’ attention is on risk management and tactical asset allocation.”

Lars Kallholm, executive director, head of Nordic markets, UBS Global Asset Management, explains that looking to increase an allocation to alternatives does not have to be diametrically opposed to the reassessment of one’s strategic asset allocation.

He quotes the Yale Model as an example to be followed more closely than is being done at present. For the financial year of 2007, the Yale Endowment Fund reported a return of 28% and has returned 17.8% over the last decade with assets growing from US$5.8bn (£3.1bn)to $22.5bn.

Alternatives form a much larger portion of the Yale pie than Nordic investors are used to. As of 2007, the fund had a 23.3% allocation to absolute return and an 18.7% exposure to private equity.

“In my view, the Yale model has proven to function now for some 20 years,” says Kallholm. The focus on return and risk management, he says, is vital and these are lessons all investors must learn.

However, industry players believe that the panic-stricken investors still have a yearning for alternatives that can be rekindled. According to Sanbeck of BGI, alternatives will still get attention since pension funds want to reduce correlation and access all the risk premiums available – illiquidity, time, and others – and don’t mind not being marked to market daily. Eggertsen also believes alternatives are still on people’s minds and Nordic investors will most likely look to increase their allocation – just not now.

Before the storm
Prior to the havoc wreaked during the third week of September – which saw banking giant Lehman Brothers collapse – alternatives were in high demand by Nordic investors, as revealed in the Kirstein report.

Alternative investment experienced a lot of hype, but when one looks beyond the media furore, the reasons behind the demand can be broken down and better understood.

“Alternatives have seen a lot of interest, especially hedge funds,” says Jonsson, of DnB NOR. In
the retail space, this interest is driven by absolute return expectations, while institutional investors, also being interested in cash returns, generally look to alternatives for diversification.
“Going forward we will definitely see Nordic investors increasing their exposure to alternatives,” says Lars Eigen Moller, executive vice president of Danske Capital.

Although most in the market agree investment in alternatives is a trend that is here to stay, most warn there are some critical issues to take into consideration before making any sweeping statements.

The one asset class that seemed to get approval from all the major Nordic players is infrastructure. The offer of real assets acting as an inflation-hedge has obviously been deemed quite attractive considering the volatile period investors are in.

All the other so-called alternative classes, however, have shown nuances in different Scandinavian markets. “It is difficult to talk about an alternatives trend in the Nordic region, because there is no single trend across every country,” says Sanbeck of BGI.

The definition of what constitutes alternative investments differs greatly from country to country and this is usually as a result of past experiences with the particular asset class.

“There is quite a big difference from country to country,” says Eggertsen of T. Rowe Price. “For example, in Norway the term ‘alternatives’ covers everything from hedge funds to emerging markets.”

Eggertsen explains that the Norwegian wariness of alternatives most probably stems from the collapse of a few local hedge funds. This resulted in strict constraints around investments in alternatives. Many had expected the new rules to allow at least up to 15% allocation to alternative buckets. Instead Norwegian investors are now able to allocate just 7% of their portfolio to any of the assets classed as alternative. The Danish and Swedish markets are less restrictive and both countries have seen their large institutional investors at the forefront of investment thinking – with funds like ATP and the AP funds making long-term commitments to alternatives a while back.

Interestingly, although both these markets have a more open attitude to alternatives in general, they are clear differences in the preference of one asset class over another and this again has been shaped by history.

Sanbeck of BGI says: “Swedish investors are only now moving into real estate. In the early 1990s there was a financial crisis in Stockholm that saw investors flee from real estate.” Therefore, in Sweden, property is alternative. However, it is not so in Denmark where almost all investors have had an allocation to property of 5-15% for the past 15 years.

Hedge funds, on the other hand, are assets the Swedes feel comfortable with. There have been a few successful local hedge funds such as Brummer & Partners that have increased the investors’ confidence in dealing with the asset class.

In Denmark, investors are slowly warming up to the idea of hedge funds and have been making allocations to funds of hedge funds. The larger institutions, such as PFA, have only just begun to move into single hedge fund investments.

However, it is not only the institutional market that has been expressing interest in alternative asset classes. The retail side of the business has also been increasing its allocations to institutional-type investments like hedge funds and absolute return products.

Retail interest
Like much of Europe, the Nordics have experienced a flight from equities. Also, investors have been looking to absolute return products that can offer them positive returns using management techniques that differ from the norm.

Nils Bolmstrand, CEO of Skandia Fonder, discusses this phenomenon. “There have been positive flows into absolute return products – particularly the more defensive side of the hedge fund structure.”

But Bolmstrand also says that too many products created for the institutional market are now being offered to the retail side
– which is cause for concern since retail investors do not carry out ALM studies or have any concept of strategic asset allocation.

So it is the concept of strategic asset allocation and portfolio structuring that many industry players believe should take precedence over the importance of asset classes – whether retail or institutional.

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